Minimum Wage, Maximum Folly

Interesting news on the minimum wage front this weekend. First, the Brookings Institution, perhaps better known as the Hillary Clinton administration-in-waiting, put out a note by an economist who served in the last Clinton administration that is highly critical of the proposal for a national $15-an-hour minimum wage:

Many economists worry minimum wage increases tend to reduce employment, hurting young and less-educated workers the most. And they have analyzed the effects of state and federal increases in the U.S. and other countries in hundreds of statistical studies. Some credible studies find moderate negative effects while others find none; our best guess is that moderate minimum wage increases will lead to modest job losses. In a Congressional Budget Office report last year, policy analysts predicted that Obama’s proposal to raise the federal minimum wage to $10 an hour would raise wages for 16 to 24 million people while eliminating about half a million jobs – a reasonable tradeoff worth embracing, in my view.

But I have much more serious worries about a $15 an hour minimum wage, which constitutes a wage increase of 50% to 100% in most places (even after adjusting for inflation). In cities like Seattle, with a relatively more educated workforce and dynamic labor market, it might be a gamble worth taking. But in other cities, such as L.A. and Washington, D.C. – with their large populations of less-educated workers, including unskilled immigrants – such increases are extremely risky.

In job markets where young or less-educated workers already have difficulty finding jobs and gaining important work experience, such mandates will likely make it much harder. . .

Trying to accomplish this [raising wages] by simply making 15 the new 10, in terms of minimum wage increases, could potentially generate more harm than good

I’m sure Hillary and Bernie will pay close attention to this.

Meanwhile, remember the guy in Seattle who got so much national adulation for setting a minimum annual salary of $70,000 at his credit card payment processing company? Turns out it’s not working out so well. Even the New York Times noticed:

. . . almost overnight, a decision by one small-business man in the northwestern corner of the country became a swashbuckling blow against income inequality. . . What few outsiders realized, however, was how much turmoil all the hoopla was causing at the company itself. . .

. . . a few customers, dismayed by what they viewed as a political statement, withdrew their business. Others, anticipating a fee increase — despite repeated assurances to the contrary — also left. While dozens of new clients, inspired by Mr. Price’s announcement, were signing up, those accounts will not start paying off for at least another year. To handle the flood, he has already had to hire a dozen additional employees — now at a significantly higher cost — and is struggling to figure out whether more are needed without knowing for certain how long the bonanza will last.

Two of Mr. Price’s most valued employees quit, spurred in part by their view that it was unfair to double the pay of some new hires while the longest-serving staff members got small or no raises. . .

The new pay scale also helped push Grant Moran, 29, Gravity’s web developer, to leave. “I had a lot of mixed emotions,” he said. His own salary was bumped up to $50,000 from $41,000 (the first stage of the raise), but the policy was nevertheless disconcerting. “Now the people who were just clocking in and out were making the same as me,” he complained. “It shackles high performers to less motivated team members.”

Funny how that last part works. In a competitive economy, people like to be rewarded on merit. Not just in the job market either. I’ve toyed with the idea of awarding a minimum grade (B+?) to all students in my classroom, or redistributing the A grades to the C grade students. This usually gets the point across quite quickly.